Growing the NZ economy: The contribution of Boards

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Growing the NZ economyThe contribution of Boards

• David Skilling
• May 2007
• www.nzinstitute.org

http//www.sheffield.co.nz/news/David-Skilling-Pre
sentation-May07.pdf
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AGENDA

• New Zealands economic performance and prospects
• New Zealands current level of international
  engagement
• The role of New Zealand Boards
• Developing Kiwi global champions
• Creating a competitive New Zealand economy

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NEW ZEALANDS RELATIVE INCOME DECLINE WAS HALTED
DURING THE 1990s, BUT LARGE INCOME GAPS REMAIN
Real per capita GDP (OECD average 100)
USA
Ireland
Australia
Finland
New Zealand
Source OECD.
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NEW ZEALANDS GDP PER CAPITA IS NOT WITHIN THE
TOP HALF OF THE OECD
GDP per capita (PPP) indexed to OECD average, 2004
High Income
High-Middle Income
Low-Middle Income
OECD Average
Source OECD.
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COMPONENTS OF PER CAPITA INCOME
Labour Utilisation Total hours worked
x
Per capita income

Labour Productivity Output per hour worked
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NEW ZEALANDERS ARE HARD WORKING BUT ARE NOT AS
PRODUCTIVE AS WORKERS IN OTHER COUNTRIES
Luxembourg
Iceland
Hours worked per capita (OECD Average 100)
New Zealand
Canada
Japan
USA
Australia
Spain
Switzerland
Denmark
Ireland
Greece
Finland
UK
Sweden
Austria
Netherlands
Germany
Italy
Belgium
France
Output per hour worked, 2005 (OECD Average 100)
Source Groningen Growth and Development Centre
and the Conference Board, Total Economy Database,
August 2005.
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INTERNATIONAL ENGAGEMENT IS VITALLY IMPORTANT TO
NEW ZEALANDS FUTURE ECONOMIC PERFORMANCE

• New Zealands economic performance has been
  strong over the past 15 years, but a substantial
  economic challenge lies ahead
• The main driver of New Zealands stronger
  economic growth over the past 15 years labour
  force growth cannot be sustained at these
  levels over the next 15 years
• For a small country like New Zealand, achieving
  higher rates of productivity growth will
  necessarily involve increased international
  economic activity
• Exporting of goods, services and ideas, and
  outward FDI by New Zealand firms
• New Zealands ability to compete successfully in
  the global economy will have a defining influence
  on our future economic performance

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NEW ZEALANDS EXPORTS HAVE GONE SIDEWAYS AS A
SHARE OF THE ECONOMY OVER THE PAST 20 YEARS
Exports as a of GDP
Source World Development Indicators (1971-1987),
Statistics NZ (1988-2005).
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NEW ZEALAND HAS NOT KEPT PACE WITH WORLD EXPORT
GROWTH
Value of Goods and Services exports, indexed to
1971
World
66 Gap
OECD
19 Gap
New Zealand
Note 1971 100. Source World Development
Indicators.
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NEW ZEALAND EXPORTS LESS THAN MOST DEVELOPED
COUNTRIES
Exports as a of GDP, 1990 and 2005
168
142
Note OECD average for 1990 and 2003. Source
OECD National government statistics for Chile,
China, and Singapore.
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NEW ZEALANDS OUTWARD FDI REDUCED THROUGH THE
1990s, PARTICULARLY RELATIVE TO OTHER DEVELOPED
COUNTRIES
Outward FDI as a of GDP
Developed Countries
New Zealand
Source UNCTAD.
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NEW ZEALAND IS DISTINCTIVE IN HAVING A LOW AND
REDUCING OUTWARD FDI STOCK
Outward FDI as a of GDP
1980
1990
2005
Source UNCTAD.
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THE EXTENT OF NEW ZEALANDS INTERNATIONAL
ECONOMIC INTEGRATION HAS REDUCED SINCE 1990
99
Internationalisation Index, 2004
268
Index change since 1990
FDI/GDP
Exports/GDP
Note Internationalisation Index FDI/GDP
Exports/GDP. Source UNCTAD OECD National
government statistics for Malaysia and Singapore.
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NEW ZEALAND HAS NOT GROWN LARGE COMPANIES IN THE
WAY THAT OTHER COUNTRIES HAVE
711
326
Forbes 2000 companies (Column)
Per Million population (Line)
Sources Forbes Magazine.
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NEW ZEALANDS INTERNATIONAL PERFORMANCE SEEMS
BETTER IN SPORTS THAN IN BUSINESS
Olympic Medals (Line)
Forbes 2000 Companies (Column)
Note Olympic medals from 1996, 2000, and 2004
per million population and Forbes 2000 companies
per million population. Sources Forbes Magazine
The New Zealand Institute calculations.
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THE CONTRIBUTION THAT BOARDS CAN PLAY IN MOVING
NEW ZEALAND FORWARD

• New Zealand has some very significant economic
  challenges ahead
• New Zealands current course and speed is not
  sufficient to achieve New Zealands economic
  goals
• There are two related roles for Boards in being
  part of the solution to this challenge
• Creating Kiwi global champions growing many more
  New Zealand companies into international markets
• Strengthening the competitive position of the New
  Zealand economy by contributing to the public
  debate

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RESEARCH SUGGESTS FOUR GUIDING PRINCIPLES FOR
INTERNATIONAL SUCCESS BY NEW ZEALAND FIRMS

• Commitment to international success
• Recognition of imperative
• Bold aspirations

• Focus on competitive advantage
• Explicit decision on how to compete
• Allocation of scarce resources to match decision
• New market choices based on fit with competitive
  advantage

• International growth in steps
• Increasingly bold steps into new markets
• Formal processes to learn from each step

• Experienced insiders in global markets
• On the ground learning in new markets before
  major investment
• Rotation of executives between markets

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SOME NEW ZEALAND FIRMS HAVE FAILED TO FOLLOW
THESE GUIDING PRINCIPLES

• Commitment to international success
• Comfort with domestic status due to perceived
  security of domestic position, or capital market
  scepticism

• Focus on competitive advantage
• Replication of NZ model, with insufficient regard
  for new competitive environment
• Bias towards choosing Australia as first offshore
  market

• International growth in steps
• Risky bet the company moves

• Experienced insiders in global markets
• Major investment based largely on outside-in
  analysis
• NZ executives with little international
  experience leading offshore operations

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THE ROLE OF BOARDS IN CREATING KIWI GLOBAL
CHAMPIONS

• Governments dont grow economies, companies and
  people do. For the New Zealand economy to grow,
  there is a need for ambition and disciplined
  execution at the firm level
• Boards should have an important responsibility in
  setting the aspiration for the company, pushing
  on international engagement
• They need to signal to management that they
  welcome proposals for investment and growth, even
  if they do not sign off on all of them
• Boards need to take responsibility for
  supporting, championing, and encouraging growth,
  rather than on managing risk
• If cut down on the risk, also reduce the likely
  return to the firm - and to New Zealand

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ARE BOARDS CURRENTLY PERFORMING THIS ROLE?

• Boards spend a lot of time on issues that are
  related to compliance, with a consequent focus on
  risk management rather than on the major
  strategic issues
• Surveys reveal that there is a belief that the
  focus has shifted towards managing downside risk
  rather than looking to seize the upside potential
• Anecdotally, many New Zealand companies seem to
  operate in a risk averse manner
• A 2006 McKinsey Company survey of directors in
  Australia, New Zealand, and Canada, found that
  directors have concerns about the growing
  regulatory compliance burden
• Only 20 of respondents believe that they are
  currently a strategic asset
• Boards have a key responsibility for improving
  the way in which they work and becoming more
  effective
• Ensure right Board composition the need to have
  people with business experience, knowledge of
  international markets, comfort with
  decision-making under uncertainty
• Create culture of partnership between Board and
  management
• Focus the Boards agenda on the issues that
  really matter

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EXERCISING PUBLIC LEADERSHIP

• It is important for New Zealand that business is
  engaged constructively on the issues that matter,
  and make a contribution to the public debate
• Not healthy to leave the debate up to the
  politicians and officials
• There is a strong business presence in public
  debates in countries like Australia, the US, and
  the UK, which leads to a richer debate there is
  a sense of civic responsibility
• This is good for New Zealand, but there is also
  some enlightened self-interest at work here
• Ensure that there is a supportive public
  environment in which to operate and that business
  is regarded as a contributor to important issues
• Also helps business to develop a deeper view as
  to the issues that will impact on business that
  they may otherwise miss

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CONCLUDING REMARKS

• The New Zealand economy has great potential, but
  also faces some very significant challenges
• Meeting these challenges is partly about
  developing better policy settings, but more
  significantly it is about leadership and vision
  and a willingness to take some risks
• There is a need to develop a stronger growth
  mentality in the private sector and to become
  better at and more comfortable with taking risks
• Business leadership in New Zealand has a vitally
  important role in moving the New Zealand economy
  forward, in terms of both the ways in which they
  exercise leadership within their firms as well as
  in their contributions to the national
  conversation

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Growing the NZ economyThe contribution of Boards

• David Skilling
• May 2007
• www.nzinstitute.org